The CCCTB Allocation Formula Game: The Performance of Economics Sectors

Abstract

The implementation of the Common Consolidated Corporate Tax Base (hereinafter CCCTB) in the European Union will probably have an impact on tax revenues of the concerned states since the distribution of the group tax base shall reflect the capacity to earn income by individual group members. This is secured by the employing of the allocation formula containing three factors that shall reflect the profit generating process of individual companies. The paper analyses the explanatory power of the proposed CCCTB formula on the data sample of group companies with a link to the Czech Republic -either parent or subsidiary company in the group covered in dataset is tax resident of the Czech Republic. The obtained results are evaluated on the level of individual economic sector with the aim to verify if the proposed CCCTB formula is the most suitable for them, where the sufficiency of the explanatory power of the allocation formula was indicated based on the assigned change of distributed profit to the respective economic sector.

Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach

“…A detailed study of the explanatory power of the CCCTB FA was performed by Nerudová and Krchnivá (2016), who concluded that it is able to explain almost 35% of variability in profitability. Krchnivá and Nerudová (2018) studies have agreed that when compared to alternative compositions of the FA, the CCCTB FA is the best-performing formula, significantly explaining the highest percentage of variability in profitability. In addition, Roggeman et al (2012) tested the inclusion of intangible assets and concluded that it does not enhance the explanatory power of the FA.…”

“…The FA explanatory power of the variability in profitability of companies significantly depends on the choice of factors implemented in the FA and their relative weights. The CCCTB FA was addressed by Hundsdoerfer and Wagner (2020), Krchnivá and Nerudová (2018), Nerudová and Krchnivá (2016) and Roggeman et al (2012). Said empirical studies investigated microeconomic data and based on a regression analysis estimated the percentage of explained variability in profitability.…”

“…The systematic literature review of empirical literature in this field revealed that some scholars, such as Krchnivá and Nerudová (2018), Nerudová and Krchnivá (2016), Roggeman et al (2012) and Hines (2008) have employed analysis of cross-sectional data to investigate the ability of the FA to explain the variability in profitability of companies. However, congruently with…”

“…Under the FA methodology, in accordance with pertinent theory (Hundsdoerfer and Wagner, 2020;Krchnivá and Nerudová, 2018;Nerudová and Krchnivá, 2016; Hines, 2008), it is highly desirable for the allocation formula to effectively capture and mirror the profit generation process of companies. Nevertheless, Weiner (2006) contended that explanatory power alone does not encompass all desired attributes 3 .…”

“…The labour factor, according to articles 32 and 33 of the CCCTB proposal, is calculated from the total amount of the payroll and the number of employees. As in Krchnivá and Nerudová (2018), Roggeman et al (2012) and Hines (2008), this paper employs the number and costs of employees as a proxy variable. The sales factor, according to article 37 of the CCCTB proposal, is the proceeds of all sales of goods and supplies of services after discounts and returns, excluding value added tax and other taxes and duties.…”